Virginia’s Attorney General Faces Scrutiny for Ties to Executive

Attorney General Kenneth T. Cuccinelli II and his wife, Teiro, after he was nominated as the Republican candidate for governor of Virginia.Credit
Steve Helber/Associated Press

He first bought the tiny company’s stock after bunking down in its chief executive’s six-bedroom home.

He added to his holdings soon after the rollout of a new product that the company hinted could be a cure for Alzheimer’s disease.

As the stock reached a 52-week high last year, he sold part of his portfolio for a $4,000 profit.

Kenneth T. Cuccinelli II, Virginia’s attorney general, said that the timing of his ownership of Star Scientific shares reflected nothing more than his own investment analysis.

Star Scientific and its chief executive have been at the center of an exploding political drama in Virginia as state and federal investigators look into lavish gifts that the executive, Jonnie R. Williams Sr., gave Gov. Bob McDonnell.

Aides to Mr. Cuccinelli, the Republican candidate for governor this year, insisted he enjoyed nothing like the relationship to Mr. Williams that Mr. McDonnell had. Last week Mr. Cuccinelli indirectly condemned Mr. McDonnell, a fellow Republican, for the first time, lamenting, “What we’ve all been seeing is very painful for Virginia.”

The statement followed a report that Mr. Williams’s gifts to the governor and his family totaled $145,000, and included a Rolex watch, designer clothing and a $50,000 check to Mr. McDonnell’s wife. The gifts were first revealed in The Washington Post.

Mr. Williams, 57, also gave the attorney general $18,000 worth of gifts, including frequent stays at Mr. Williams’s homes outside Richmond and in the Blue Ridge Mountains, according to Mr. Cuccinelli’s financial disclosure statements. Mr. Cuccinelli at first failed to report some gifts, as well as his Star Scientific stock, as required by law, which he has said was an oversight.

The attorney general is not known to be a target of the investigations into Mr. McDonnell, including one by a federal grand jury. At no time, the attorney general said, did he receive stock tips from the executive. But Mr. Cuccinelli’s buying and selling of Star Scientific shares raises questions about whether he and Mr. Williams were as distant as campaign aides insist.

Star Scientific was Mr. Cuccinelli’s only stock holding worth more than $10,000 since he became attorney general, according to his disclosure forms. In at least two cases, his buying and selling was closely timed to vacations he and his family enjoyed as guests of Mr. Williams.

In a statement, the campaign said that Mr. Cuccinelli never discussed his stock purchases or sales with Mr. Williams “at any point in time.”

On Friday, a Virginia judge ruled that a trial of Mr. McDonnell’s former Governor’s Mansion chef, whose statements to investigators first drew them to Mr. Williams, could proceed in October. The trial, on charges of pilfering food from the governor’s kitchen, will return all the players to the footlights just a few weeks before Mr. Cuccinelli faces Terry McAuliffe, his Democratic opponent, at the polls.

For a relative novice at stock picking, Mr. Cuccinelli’s investment in Star Scientific was highly unusual. It is a thinly traded stock in a company that has lost money for a decade. It stayed afloat by selling stock at a discount in “private placements” to large investors, whose hopes were repeatedly raised by company promotions about big payoffs.

In that sense, Star seems an extension of the personality of Mr. Williams, who has been called a “super salesman” since his earliest years in business.

Mr. Williams, who declined through a company spokeswoman and his lawyer to comment, repeatedly ran into trouble with regulators. The Food and Drug Administration forced him to stop selling a cigarette called LungGuard over false claims that it blocked carcinogens. The Securities and Exchange Commission collected $300,000 for incorrect claims that a skin cream cured wrinkles.

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For years the stock of Star Scientific was buoyed by investors led to expect a windfall from a patent infringement suit against the tobacco giant R. J. Reynolds. When a jury ruled against Star in June 2009, the stock plunged 80 percent.

It came back the next year as the company aggressively trumpeted a new business — a dietary supplement derived from a chemical in tobacco to treat Alzheimer’s disease.

It is unclear how Mr. Cuccinelli first met Mr. Williams. When the attorney general took office in 2010, he sometimes stayed in Mr. Williams’s $2.2 million home outside Richmond while his family remained in the northern suburbs.

In late October 2010, Mr. Cuccinelli made his first purchase of 5,060 shares of Star Scientific, at $1.98. A month later he, his wife and their seven children spent Thanksgiving at a vacation home that Mr. Williams owned on Smith Mountain Lake, near Roanoke, dining on a $1,500 catered dinner that Mr. Williams paid for, according to the attorney general’s financial disclosure.

In 2011 Star Scientific rolled out its tobacco-derived treatment, called Anatabloc, which the company was careful not to call a cure for Alzheimer’s. Instead, it was marketed for its “anti-inflammatory” properties. But in private conversations, Mr. Williams was less circumspect. “Williams has absolutely no doubt about the nutraceutical he has discovered,” wrote Patrick Cox, the author of a biotech newsletter, Breakthrough Technology Alert, after meeting the executive. “If you’re accustomed to speaking with extremely careful scientists, as I am, he’s nothing like that. Nothing.”

Another person who responded favorably to Mr. Williams’s pitch was Maureen McDonnell, the governor’s wife. Mr. Williams flew her in June 2011 to a conference where she “wowed” investors, one reported. Two months later, Mrs. McDonnell was the host of the official rollout of Anatabloc at the Executive Mansion in Richmond.

Within weeks, Mr. Cuccinelli made his second purchase of stock, adding 3,600 shares of Star Scientific at $2.80. It continued its climb for a year, hitting a peak in early July 2012. In June, Mr. Cuccinelli used Mr. Williams’s lake house again, and after his vacation, he sold 1,500 shares of Star Scientific for a profit of $4,041. His campaign said he sold the shares on the open market “in order to free up capital for personal expenses that were due shortly thereafter.”

The Cuccinelli campaign denied allegations by lawyers for the former chef that Mr. Cuccinelli played an improper role in the chef’s prosecution. The chef, Todd Schneider, told investigators from the attorney general’s office in March 2012 about Mr. Williams’s ties to Mr. McDonnell.

Deputies of the attorney general “walled off” Mr. Cuccinelli from the investigation for months, according to the Cuccinelli campaign. But once Mr. Cuccinelli was briefed, he felt “compelled” to review his holdings in Star Scientific, his campaign said, at which point he disclosed his ownership.

He also neglected to disclose his stay at Mr. Williams’s lake house in 2012 until “a staffer reminded Ken of the trip” in April 2013, the campaign said. “I’m the one who went back and found” the omissions, Mr. Cuccinelli told reporters when pressed at a campaign stop last week.

Even before Mr. Williams and his company received wide scrutiny, the Anatabloc story was cracking. Sales of the supplement were slow. Star Scientific reported a net loss of $8.2 million for the first quarter of 2013.

A storied entrepreneur, Richard L. Sharp, a founder of CarMax, who joined the board after learning he had early onset Alzheimer’s, resigned without explanation in 2011. A clue was provided by a daughter, Donna Suro, who blogged that her father had been popping Anatablocs like Tic Tacs until suffering severe side effects. “His weight reached an undesirable low point, which was cause for concern,” she wrote. “He was also cold all the time.” Her conclusion: “Perhaps it will be a better weight-loss supplement rather than a cure for dementia.”

In March, the company disclosed that its private placements of stock were being investigated by the Justice Department. The next month, as the controversy around Mr. Williams and Mr. McDonnell hit the newspapers, Mr. Cuccinelli sold his remaining 7,160 shares in Star Scientific. He did so “upon the counsel of his financial adviser,” his campaign said. He took a big loss.

Correction: July 19, 2013

A picture caption in an earlier version of this article misspelled the given name of the wife of Kenneth T. Cuccinelli II, Virginia’s attorney general. She is Teiro Cuccinelli, not Tiero.

A version of this article appears in print on July 16, 2013, on Page A12 of the New York edition with the headline: Virginia’s Attorney General Faces Scrutiny for Ties to Executive. Order Reprints|Today's Paper|Subscribe